Heads Up Ohio Wholesalers! Potential NEW Legal Ramifications of Wholesaling
Full time real estate investor · Port Orchard, WA · Member since 2013 · 54 posts · 16 votes
The other day, I had an interesting conversation with the executive director of the Ohio Department of Commerce. He had called me in response to a complaint I filed against a broker who asked me not to make any offers on any more of her properties in the future. It was apparent that she either does not like--or does not understand--the business of wholesaling. Anyway, the complaint earned me a call from the director who told me that his department is actively pursuing wholesalers in Ohio who are not licensed to "market properties that they do not own." In other words, even though there is a purchase and sale agreement, a wholesaler needs to have a real estate license in order to market the property during the inspection period. Insane!
He called it "unlicensed activity." The funny thing is when I asked him about marketing the contract--as oppose to the property--he never responded.
Anyway, just take this as a heads up that Ohio is not playing nice. They are investigating and fining unlicensed wholesalers $1,000.00 per day per violation.
It's very sad , but true that people tend to fear what they do not understand. I wonder if wholesalers in other industries experience the same type of static?
Take care out there.
Everyone should note the lead sentence in the article includes the clause "which may be providing instructions on how to circumvent real estate license law"
@Steve Babiak @Jonny S. @Andy Argonaut The unlicensed activity on page 8 was for Property Management without a license. There is no court of law involved, only the Division of Real Estate.
I've had a few conversations with the State of Ohio Division of Real Estate about wholesaling and other typical real estate investor activities.
Back in 2007 the Division of Real Estate head Attorney explicitly stated that wholesaling by assigning a Purchase and Sale agreement did not need a license, however for an option agreement she thought it did need a license.
In Sept 2013, I had a lengthy conversation with one of the Division of Real Estate enforcement section investigators. I believe he was the lead investigator.
The summary of the conversation is as follows.
Ned Carey
I totally agree.
Although, the issue itself is not new, the fact that the DOC is starting to actively pursue unlicensed wholesalers is definitely new, and it is a problem.
Do investors of securities have to become licensed securities brokers in order to sell the stocks they buy? No, they do not; their representatives--or stock brokers--do.
It does not make sense that a wholesaler, aka. the investor, should be required to be licensed as a broker, as a broker is in the business of *representing others* in a transaction, and an investor is acquiring properties to either hold or immediately re-sell to another investor. They are not the same; therefore, they should not be held to the same licensing laws.
Suzette West was your original complaint to the real estate commission or the dept of commerce.
I found the real estate commission here pretty good. In a meeting for new agents the question came up about "do I have to pass along junk offers to clients when they fax 50 lowball offers?' They answered yes. If it meets the the criteria of an offer, you must present it to the client. They also made it clear it DID NOT have to be on a board of realtors contract. It could be a 1 page offer.
Ned Carey
It was the real estate enforcement arm of the Department of Commerce for the State of Ohio.
It sounds like the commission in your home state is knowledgeable and fair. It's definitely something worth looking into.
Bureaucrats tend to fear what they do not understand, and then they act accordingly. Too bad it has the potential of hurting a lot of good people along the way.
I found the real estate commission here pretty good. In a meeting for new agents the question came up about "do I have to pass along junk offers to clients when they fax 50 lowball offers?' They answered yes. If it meets the the criteria of an offer, you must present it to the client. They also made it clear it DID NOT have to be on a board of realtors contract. It could be a 1 page offer.
How many of you are tying up properties with contracts and then publicly marketing/offering to sell your option or contract? Be honest. Don't most of you market the property first and foremost, using the property address? Are you even including any language about the contract? Most state laws say you can't market properties (offer to sell properties) that you don't own. There is no law against selling what you do own. But I'd be careful about marketing property that you don't own.
How many of you are marketing using language that says: Equitable interest in purchase agreement for sale? Option assignment available for cash? I usually have to ask the wholesalers who call me more than once if they own the property or not. They tend to be fuzzy on the ownership issue.
Thank you for introducing some logic into this conversation. It was hard to pick out through all the whining in the rest of this thread.
Peter, there is no whining here. We are discussing something that people need to know. Not sure why you are bringing the negative attitude to the discussion; but it is unnecessary.
The way I see it, the laws in OH aren't really infringing upon the buying/selling/assigning of your contracts. It is infringing on your ability to market the the owner's property without a license. For some reason, I don't have a problem with this. Presumably, consumers are protected by a law where unlicensed third parties (regardless of equitable interest) are prohbited from advertising for sale properties they don't own or don't have a listing on. Let's face it, the state RE depts. and realtor boards got there first on that one.
I don't see how becoming an agent helps in the regard. If you have an option, you don't own the property, and you don't have a listing. So you are licensed, but how are you allowed to market the property....by law? Additionally, IMO agents are asking for trouble by signing up properties and trying to mark them up before they own them. Even with disclosures to the seller that your contract is buy and not list, there is some conflict there when it comes to your supposedly professional value of opinion when you are licensed. I'm not willing to get a license for this reason.
If your buyers list is big enough, why do you need to publicy market the property? Why not market your contract or option? I'm guessing because a lot wholesalers don't have a big fast list of sophisticated cash buyers, the buyers who understand assignments and double closings, etc. (But you should!) Additionally, it may be totally possible to stay away from marketing the property if you write your marketing copy correctly. I'd check with an attorney about how you can advertise for sale your interest in a contract and stay within the law.
Transactional funders don't fund unless there are two escrows ready to close. So it's not "extended transactional funding" you would be looking for. Just regular old hard money or bridge loans. The lenders are taking risk once they fund for real, so you'll have to pay for it. I don't know of any lenders that will lend at of 80-90% FMV, so it may be impossible to get lender funds for a deal where you are getting a $5-10K mark-up.
Hi Kristine,
You make a great point about wholesalers having a list of buyers to call, as opposed to advertising for them; and contacting an attorney to understand how to advertise an equitable interest for sale within the confines of the law.
Very good advice! Thank you for sharing.
Been through this with a couple of states. In each case the law said for another and that threw out their jurisdiction right out the window.
Secondly there was no agency relationship involved of any kind, thus throwing out another last gasp at trying to require a license.
Now I do have to give one warning, it is all to common for a wholesaler to say I 'll find a property for you to a prospective buyer. At that point you have just created a legal implied agency relationship as far as I'm concerned but until you get a disgrunted buyer your not likely to even get a whisper of this threat.
I do believe a state agency can nail you on that approach if they decide to shorten their 4 hour coffee breaks. Your not selling your rights in an established contract where you are a principle, you are not a principle in anything at that point. Your just a person intending to make some money off that prospect at that point so don't say I'll find you a property, let it hang at I'm an investor out trying to acquire property everyday and if I get a property that meets your requirements I'll give you first shot at it.
Looking at the legal definition, the key point is the phrase "who for another" (in bold below). A wholesaler is not representing anyone else other than their own personal interest.
Letters from the state have been going around since at least 2005 and get sent to anyone who creates an LLC with real estate or property in the name.
I will be at a real estate meeting with Nick as a presenter in the near future. I'm looking forward to the entertainment when the Q & A portion begins.
(A) "Real estate broker" includes any person, partnership, association, limited liability company, limited liability partnership, or corporation, foreign or domestic, who for another, whether pursuant to a power of attorney or otherwise, and who for a fee, commission, or other valuable consideration, or with the intention, or in the expectation, or upon the promise of receiving or collecting a fee, commission, or other valuable consideration ....
Here is a section of what I found.
4735.01 Real estate broker definitions.
As used in this chapter:
(A) "Real estate broker" includes any person, partnership, association, limited liability company, limited liability partnership, or corporation, foreign or domestic, who for another, whether pursuant to a power of attorney or otherwise, and who for a fee, commission, or other valuable consideration, or with the intention, or in the expectation, or upon the promise of receiving or collecting a fee, commission, or other valuable consideration does any of the following:
(1) Sells, exchanges, purchases, rents, or leases, or negotiates the sale, exchange, purchase, rental, or leasing of any real estate;
(2) Offers, attempts, or agrees to negotiate the sale, exchange, purchase, rental, or leasing of any real estate;
(3) Lists, or offers, attempts, or agrees to list, or auctions, or offers, attempts, or agrees to auction, any real estate;
(4) Buys or offers to buy, sells or offers to sell, or otherwise deals in options on real estate;
(5) Operates, manages, or rents, or offers or attempts to operate, manage, or rent, other than as custodian, caretaker, or janitor, any building or portions of buildings to the public as tenants;
(6) Advertises or holds self out as engaged in the business of selling, exchanging, purchasing, renting, or leasing real estate;
(7) Directs or assists in the procuring of prospects or the negotiation of any transaction, other than mortgage financing, which does or is calculated to result in the sale, exchange, leasing, or renting of any real estate;
(8) Is engaged in the business of charging an advance fee or contracting for collection of a fee in connection with any contract whereby the broker undertakes primarily to promote the sale, exchange, purchase, rental, or leasing of real estate through its listing in a publication issued primarily for such purpose, or for referral of information concerning such real estate to brokers, or both, except that this division does not apply to a publisher of listings or compilations of sales of real estate by their owners;
(9) Collects rental information for purposes of referring prospective tenants to rental units or locations of such units and charges the prospective tenants a fee.
The way I see it: part of the problem is that wholesalers often refer to their mark-up or profit on their buy as a "fee". Every state law I've looked at says collecting a fee is restricted to licensed individuals. For starters, how about you all stop calling it a fee.
Seems to me, #4, #6, and maybe #7 will include most wholesalers.
The sub paragraphs only apply when used with the primary paragraph, with the phrase "who for another" does 4,6 or 7.
For example take number #6.
I can do "selling, exchanging, purchasing, renting, or leasing real estate" for myself.
I cannot do it for "for another", aka "you" .
Interesting Post. Curious to see how things go.
In my own investing I have considered much of what is written in this thread. Some great advice I got from a great local real estate attorney (Pittsburgh) is this:
In your investing, do things that will differentiate you from what an agent does. If it looks like a duck and quacks like a duck... you know what they are going to call it. So here's some of his suggestions:
Try not to only wholesale properties. Buy a rental here and there. Do a fix and flip here and there. And when you do wholesale, offer to pay for something small to set you apart from what agent's standard roles are - i.e. offer to pay to have the grass cut once, offer to pay to have the locks changed, pay the $25 for the occupancy permit fee, put up REAL consideration on your agreements ($100-$500), have the electric turned on in your or your company's name, etc. Then when you are questioned about your activities and are accused of acting as an agent you can easily say, "Wait a minute! Does an agent close on properties? Does an agent buy, fix and resell properties? Does an agent pay to have grass cut? Does an agent pay to have locks changed? Does an agent pay for occupancy permit fees? Does an agent put hand money down on properties? Do agents pay for utilities? I do these things because I am an investor, not an agent!"
@Account Closed makes a great point here. Marketing what you don't have is the real issue. I think the root of the problem is that the gurus who teach this stuff are rarely out there practicing it or bothering to look into all the legality behind it. So, that misinformation gets passed on and you end up seeing wholesalers marketing properties when they only have a contract or option.
Having said that, I have seen wholesalers that properly advertise what they have. One way I've seen it done is by adding a disclaimer in the body of the posting, not in the title. Another way that I recently saw on Craigslist was a disclaimer in square brackets that stated the person had a contract to re-assign, which is the most upfront marketing I've ever seen. It looked something like this:
[Assigning Contract] - 3 BR Home in Middlebury School District
One open question is whether a recorded notice of option or memorandum of agreement will give you enough title interest to market the property itself and not merely the contract.
Having said that, I have seen wholesalers that properly advertise what they have. One way I've seen it done is by adding a disclaimer in the body of the posting, not in the title. Another way that I recently saw on Craigslist was a disclaimer in square brackets that stated the person had a contract to re-assign, which is the most upfront marketing I've ever seen. It looked something like this:
[Assigning Contract] - 3 BR Home in Middlebury School District
One open question is whether a recorded notice of option or memorandum of agreement will give you enough title interest to market the property itself and not merely the contract.
Andy: thanks for sharing what you've seen in other wholesaler marketing. I'm curious if the disclosures are enough to satisfy a state RE dept. But it seems prudent to disclose exactly what you are selling or offering, as opposed to listing the property address for sale and claiming an "equitable interest".
Ok, all Ohio real estate entrepreneurs may want to read the latest Ohio Division of Real Estate newsletter. Page 6 clearly states the Division of Real Estate OPINION on wholesaling.
http://www.com.ohio.gov/Documents/real_newsletterSpring2014.pdf
http://www.com.ohio.gov/Documents/real_newsletterSpring2014.pdf
I have been explaining this on this site for awhile now.
You need a license to sell real estate you dont own folks.
ITS NOT HARD TO UNDERSTAND
Thanks for the clarification @Darrin Carey @ James Wise ... I'm assuming that if I get a great deal on a property, purchase/close on said property and then resell to another buyer I would not be in violation because I am taking title and owning the property before the resale and thereby acting as a principle, correct? That the "placing the homein contract for the purpose of re-selling the property" would not apply if I actually bought/closed first even if I bought it planning to resell it at a profit?
Nothing wrong with buying a house you will later sell.
You just need to OWN the house before you start trying to sell it.
Also just an FYI Fannie homes are sold with deed restrictions not allowing you to sell for a certain amount more (120%?) than you paid for a property for 90 days after your purchase it.
Thanks for the fannie FYI @James Wise right now I just buy for rentals but am thinking of doing a few 'flips' because I get leads on homes that people basically want to give away but they often need more work then I want to take on long distance but my PM knows other investors that would buy these from me but I've been reluctant to wholesale because of what I have heard about Ohio law so if I do pass something on in an effort to help the seller I'm not making any money on the deal... Thus the buy and then resell sightly higher idea....so I can collect a little profit. Of course then you have to account for closing costs on both transactions unless you do a CFD and I have yet to look into the legalities of CFD in Ohio.
http://www.com.ohio.gov/Documents/real_newsletterSpring2014.pdf
Seems page 8 shows some wholesalers that got caught ...